"Japan Cuts Key Interest Rate; Economists Are Skeptical"
Sandra Sugawara
Washington Post, February 13, 1999, page E3
"Japan Lowers Key Rate, but (Surprise) Bond Yields Go Higher"
Sheryl WuDunn
New York Times, February 13, 1999, page B1
These articles report on the decision of the Japanese central bank to lower its overnight lending rate to 0.15 percent from 0.25 percent. Both article imply that efforts that at stimulating the economy through lowering interest rates are likely to be counter-productive. The Times article includes a warning that expansionary monetary policy (trying to lower interest rates by issuing more money) can lead to inflation, and therefore is considered out of the question. The Post article includes similar warnings, referring to Japan's hyperinflation in the 1940s. It includes an additional warning that expansionary monetary policy would "weaken the yen, threatening the stability of other Asian currencies, just as the region appears poised for recovery."
The major problem facing Japan presently is a shortage of demand, a fact implicitly acknowledged in the Times article which asserts that Japan is in a "deflationary spiral." Consumers are saving an enormous portion of their income, because they fear for the future. The reduction in consumer demand has helped push down investment as well, since slack demand has led to idle capacity in factories across Japan. Under such circumstances, the government should be taking steps that will prompt people and businesses to spend their money. Inflation should help bring about this outcome, since it causes money to lose value if people choose to hold it rather than spend it. This has been the strategy advocated by M.I.T. economist Paul Krugman (see Paul Krugman, "Japan's Trap," 5/98, http://web.mit.edu/krugman/www/japtrap.html). It would be unfortunate if an obsessive concern with inflation, echoed in these articles, prevented Japan from taking the sort of measures needed to escape its long slump.
It is worth noting that the concern expressed in the Post article about the impact of a weakening yen on other Asian currencies is inconsistent with the concern about inflation. If the yen weakens because of inflation, there is no reason to expect that it would have any negative impact whatsoever on other Asian currencies. Japanese products would cost more yen, but the yen would be cheaper relative to the dollar and other currencies, leaving the price of Japanese goods to other nations largely unchanged. (For example, if the price of a Japanese car rises by 5.0 percent measured in yen due to inflation in Japan, at the same time that the yen falls 5.0 percent in value relative to the dollar because of this inflation, then the price of the car measured in dollars will not have changed.)
Like previous articles (e.g., "An Unlikely Fear for Japan: Stiflingly High Interest Rates," by Sheryl WuDunn, New York Times, 2/3/99, page C8; "The Flip Side of the Strengthening Yen," by Paul Blustein, Washington Post, 1/13/99, page F1; and "Excess Capacity Slowing Japan's Recovery," by Sandra Sugawara, Washington Post, 12/25/98, page B9; see ERR, 1/4/99, 1/18/99, 2/8/99), both these articles include comments that present a misleadingly negative picture of Japan's current economic situation. The Post article notes that "Japan's total debt, compared with the size of its economy, is among the biggest of any of the industrialized nations." This statement is misleading since the claim rests on the fact that Japan includes its Social Security obligations as part of its debt. If the comparison were made in terms of publicly held debt, the standard measure for national debt, the data from the OECD indicates that Japan actually has the lowest ratio of debt to GDP of any major industrialized nation.
Later, the Post article notes the yield on 10-year Japanese government bonds has risen from below 0.7 percent six months ago to 2.08 percent at present. It adds that "economists began warning that rates could double," although it does not identify any economists who have issued such warnings. While this rise in interest rates over the last six months is noteworthy, interest rates had fallen sharply in the previous six months. The interest rate on 10-year government bonds at this time last year was 1.4 percent. Comparing the current rate to the extraordinarily low levels of last summer exaggerates the increase in interest rates.
The Times article misleadingly implies that Japan has become a net borrower on world financial markets. It notes the need of the Japanese government to sell large amounts of bonds to finance its deficit, and then remarks, "throughout the world, Japan is typically thought of as a source rather than an absorber of capital."
This view of Japan remains appropriate, since it continues to be a net lender of capital. The IMF projects that it will on balance lend more than $130 billion of capital to the rest of the world in 1999, more than 2.0 percent of its GDP. By contrast, the U.S. is projected to borrow more than $200 billion, an amount that exceeds 2.0 percent of U.S. GDP.
"Japan Bond Plan Fails to Impress Markets"
Sheryl WuDunn
New York Times, February 17, 1999, page C4
"Bond Market Is the Rage Across Japan"
Sheryl WuDunn
New York Times, February 19, 1999, page C1
The first article discusses efforts by Japan's government to lower interest rates by purchasing back some of its own bonds. The article implies that these effort were largely unsuccessful, saying that the move "failed to quell general concerns over the bond market and long-term interest rates." It also characterized the increase in bond prices as a result of the Japanese government's actions as "slight."
The price of Japanese bonds rose by 7.0 percent on Tuesday. This is a very large gain by most measures. U.S. bond prices have not experienced a single day gain of the same magnitude any time in this decade. The second article indicates that bond prices continued to rise by an additional 6.1 percent over the next two days, for a total increase of more than 14 percent since the government's action.
This article also decries Japan's dire economic straits, characterizing the government's bonds as "unwanted." Investors are willing to hold these bonds at just a 1.875 percent interest rate, barely more than one-third the rate the U.S. government has to pay to get investors to hold its bonds. In the view of financial markets, Japanese government bonds are far more desirable than U.S. government bonds.
"From Job Security to Survival Skills"
Sandra Sugawara
Washington Post, February 14, 1999, page E1
This article reports on efforts by the Japanese government to assist laid-off workers in finding new jobs. It includes the assertion that "some economists worry that the effort is billions of dollars down the drain. They argue that Japan needs massive deregulation and tax cuts to invigorate its economy and create lasting jobs." The economists who hold this view are not explicitly identified, but presumably there is considerable overlap between this group and the "many international economists" who believe that the best thing for Japan to do is "to close unneeded factories, allow inefficient companies to go bankrupt, deregulate the economy, and hope that out of the ashes of this collapse will spring new business" ( "Excess Capacity Slowing Japan's Recovery," by Sandra Sugawara, Washington Post, 12/25/98, page B9; see ERR, 1/4/99).
"Of World Markets, None an Island"
Nicholas D. Kristof and Sheryl WuDunn
New York Times, February 17, 1999, page A1
"World Ills Are Obvious, the Cures Much Less So"
Nicholas D. Kristof
New York Times, February 18, 1999, page A1
These articles (the third and fourth of a four-part series--see "Outstanding Stories," below) examine the factors that led to the financial crises in the developing world in the last year and a half. The first article repeatedly asserts that everyone--"including investors, scholars, and journalists--thought that the storm over Asia would probably pass." Not everyone had this view. The most visible exception was Bill Grieder, a journalist with Rolling Stone magazine and formerly with the Washington Post. His book, One World, Ready or Not, was published in 1997, and warned of exactly the sort of financial crisis that subsequently occurred.
In addition, there is a significant contingent of economists who have been warning about the fundamental instability of the international financial system for at least a decade. Such economists generally are not cited in Times articles.
At several points, this article lets false or misleading claims appear unchallenged, and makes inaccurate assertions that have the effect of sanitizing the role of the I.M.F. in the crisis. For example, it cites Treasury Secretary Rubin's comments that high interest rates were necessary in Thailand and Korea to support their currencies. It also cites Rubin's claim that countries that didn't follow the I.M.F. program, like Indonesia, suffered even more. Later it asserts that in Brazil "the collapse of the currency forced Brazil to raise interest rates."
In fact, the currencies of Thailand and Korea continued to plummet even after they raised interest rates. Joseph Stiglitz, the chief economist at the World Bank and former head of Clinton's Council of Economic Advisors, has argued that high interest rates are destabilizing in these situations, since they amplify the sense of crisis and cause more investors to try to flee with their money.
It certainly is not clear that nations that didn't follow the I.M.F. line have suffered as a result. The nation that most completely rejected the I.M.F. program was Malaysia. To date, it has experienced far less negative effects from the crisis than its neighbors, a point noted in the last article. It also is important to note that it was not the collapse of its currency that forced Brazil to maintain high interest rates; rather, it was the insistence of the I.M.F.
This article also portrays the Russian economy as having a shine of prosperity prior to its financial crisis in August of last year. It comments "that Russia's economy was falling apart. Nobody much noticed at first, it was too easy to be dazzled by the black Mercedes-Benzes, the diamond rings, and the crowded discos. In 1997 Russia's stock market performed the best in the world, rising 149 percent in dollar terms." It then adds "but behind the scenes Russia's economy was showing severe strains," and later "even as the Russian economy was quietly disintegrating."
Actually, Russia's economy could only appear healthy by the sorts of superficial measures noted here. Data from the World Bank and I.M.F. showed that it had contracted by more than 40 percent prior to the financial crisis in 1998. This decline exceeds the loss in output the U.S. suffered at the worst point in the Great Depression. This economic collapse was manifesting itself in health and mortality statistics as life expectancies plummeted. (See "Letter From Russia," by Francis C. Norzon et. al., Journal of the American Medical Association, 3/11/98.) There also has been significant political turmoil resulting from this collapse, including a series of major strikes, protests and even an armed battle over control of the Parliament building. To people in Russia, this period of economic disintegration has probably not seemed quiet.
The second article includes Russia, along with Indonesia and China, on the list of places where economic gains of recent years have not been undone by the current crisis. While this is probably true of countries like Indonesia and China, who have experienced decades of very rapid growth, it cannot be true for Russia, whose economy was already in a tailspin for seven years prior to the onset of the financial crisis.
The second article also includes the misleading comment that "if countries like South Korea and Thailand really restructure their economies in fundamental ways…then it is possible that they will emerge that much stronger from the crisis." Per capita GDP growth averaged 7.0 percent annually in South Korea in the 35 years prior to the crisis; in Thailand, the growth rate was 5.2 percent. There is no example of a country following the I.M.F. path sustaining a growth rate even half as rapid for a prolonged period of time. While it is possible that I.M.F. reforms will make these economies stronger, there is no evidence to support this belief.
"U.S. 'Observers' Lobby Against Trade Curbs on Biotechnology"
Rick Weiss and Justin Gillis
Washington Post, February 13, 1999, page A4
This article discusses the state of international negotiations taking place in Colombia on regulations governing trade in biotechnology. At one point the article comments that "unfortunately for the United States, the many U.S. government and industry representatives travelling to Cartegena have no official standing…because the United States never ratified the Convention on Biological Diversity."
The article does not is explain why it is unfortunate for the U.S. that U.S. industry representatives do not have official standing. While the representatives of the U.S. government ostensibly represent the interests of United States, the representatives of the industry represent only the corporations for whom they work. There is no reason to believe that higher profits for these corporations will necessarily advance the interests of the United States as a whole.
"Crisis in Brazil Has Limited Impact"
Paul Blustein
Washington Post, February 13, 1999, page E1
This article discusses the impact the Brazilian financial crisis has had on other economies in Latin America and in the rest of the developing world. The article suggests that the impact has been quite limited to date. This assessment is quite different from what was predicted in a series of articles last month when Brazil first devalued its currency.
These articles predicted that the crisis in Brazil would have severe negative consequences both in the rest of Latin America, and throughout the world. (See "Brazil Devalues Its Currency 8%, Roiling Markets: Engine of Latin Nations, Which Buy One-Fifth of Exports by U.S.," by Larry Rohter, New York Times, 1/14/99, page A1; "As an Economy Sinks, U.S. Sees Painful Choices," by David E. Sanger, New York Times, 1/14/99, page A1, and "Brazil Devalues Currency," by Paul Blustein, Washington Post, 1/14/99, page A1; see also ERR, 1/18/99.)
"For Black Home Buyers, a Boomerang"
Bill Dedman
New York Times, February 13, 1999, page A15
This article examines how a neighborhood in Chicago has switched in recent years from being almost all white to being largely black. The article examines the process of racial steering by realtors that insures that black homeowners will be concentrated in certain neighborhoods. This racial steering has contributed to racial segregation in Chicago and in cities throughout the nation.
"Who Went Under in the World's Sea of Cash"
Nicholas D. Kristof and Edward Wyatt
New York Times, February 15, 1999, page A1
This article (the first of a four-part series) analyzes the situation which led to the financial crises in the developing world over the last year and a half. It provides an excellent description of the growth of capital flows from industrialized nations to the developing world.
The article also includes a fascinating quote from Deputy Treasury Secretary Laurence Summers: "When history books are written 200 years from now about the last two decades of the 20th Century, I am convinced that the end of the Cold War will be the second story. The first story will be about emerging markets--about the fact that developing countries where more than 3 billion people live have moved toward the market and seen rapid growth in incomes."
Summers' predictions of the future historical account of this period seems unlikely, since his claim about rising living standards in developing nations is not supported by statistics from the International Monetary Fund, or other accepted sources. Most developing nations (China is the important exception) experienced much more rapid improvements in living in the two decades prior to 1980 than in the period since 1980. In many cases--for example, most of Latin America and sub-Saharan Africa--the last two decades has actually been a period in which living standards declined or stagnated.
"How U.S. Wooed Asia To Let Cash Flow In"
Nicholas D. Kristof and David E. Sanger
New York Times, February 16, 1999, page A1
This article, the second in the series, documents how the Clinton administration, urged on by Wall Street financial interests and often despite the objections of the president's top economic advisors, pushed Asian nations to remove constraints on capital controls.
Dean Baker is a senior research fellow at the Preamble Center.
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